Last year, this blog discussed a decision out of Ohio’s Fourth District Court of Appeals in Boone Coleman Construction v. Village of Piketon, 2014-Ohio-2377, discussing the topic of “Liquidated damages” – the predetermined amount of damages that parties designate during the negotiation of a contract, and which for an aggrieved party is entitled to collect as compensation for specific breach of the agreement.

As mentioned in that blog, the Boone Coleman decision turned most lawyers and contractors understanding of the law on its head when the Fourth District struck down $700/day liquidated damages provision, opining that the massive amount of liquidated damages that had been assessed bore no reasonable relationship to the actual damages suffered, and therefore constituted an unenforceable penalty. Late last month, however, the case took another twist when the Ohio Supreme Court reviewed, and ultimately vacated the Fourth District’s decision.

First, some background. In Boone Coleman, the defendant, Village of Piketon, Ohio, solicited bids for a public construction project for roadway improvements. Boone Coleman Construction, Inc., won the contract and agreed to build the project for $683,300.00. The contract stated that, if Boone Coleman failed to substantially complete its work within 120 days, it would be obligated to pay the Village $700/day in liquidated damages until the project was substantially completed. Boone Coleman completed the project 397 days late, and the Village deducted the liquidated damages from the contract price, paying Boone Coleman only $535,823.00.

Boone Coleman sued the Village for the balance of the contract price and the Village counterclaimed for $277,900 in liquidated damages. The trial court granted judgment in favor of the Village, finding that the Village was not liable to Boone Coleman, and that Boone Coleman was accountable to the Village for liquidated damages. On review, the Fourth District Court of Appeals disagreed with the trial court’s decision to enforce the liquidated damages provision against Boone Coleman. Specifically, the Court of Appeals ruled that $700/day in liquidated damages was unreasonable because the total liquidated damages assessed of $277,900.00 “produced an award nearly equal to 1/3 the value of the contract.”

The Fourth District concluded that “[r]easonable compensation for actual damages is the legitimate objective of liquidated damages provisions” and noted that its decision was partially based on the fact that the Village failed to produce any evidence to support the relationship between the damages specified and the actual damages that would be incurred. Because the massive amount of liquidated damages bore no reasonable relationship to the actual damages suffered, the amount constituted an unenforceable penalty.

On appeal, the Ohio Supreme Court, reversed, holding that “the appellate court’s myopic focus on the reasonableness of the total amount of liquidated damages in application, rather than on the reasonableness of the per diem amount in the contract terms, was not proper. The correct analysis looks at whether it was conscionable to assess $700 per day in liquidated damages for each day that the contract was not completed rather than looking at the aggregate amount of the damages awarded.

In so holding, the Supreme Court emphasized that liquidated damages provisions are to be reviewed prospectively, rather than retrospectively. What this means is that an analysis of a liquidated-damages provision must be focused on the reasonableness of the clause at the time the contract was executed rather than looking at the provision in hindsight. This is because liquidated damages are intended to compensate a party harmed by delay when the actual amount of damages that party would suffer from a specific breach are uncertain or difficult to prove.

The Supreme Court concluded that, because Boone Coleman entered a contract that required it to perform the project within 120 days, and took four times that long to do so, prevented it from avoiding the “result of the valid liquidated-damages provision it negotiated through able counsel.” This was because “[t]here is no sound reason why persons competent and free to contract may not agree upon this subject [of liquidated damages] as fully as upon any other, or why their agreement, when fairly and understandingly entered into with a view to just compensation for the anticipated loss, should not be enforced.”

Liquidated damages and other contract provisions are issues that can, and should, be discussed with experienced legal counsel. For questions regarding liquidated damages provisions, or any other aspect of Ohio construction law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or tharpst@harpstross.com or nhorrigan@harpstross.com.

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